I'm an Economist and Former Congressional campaign strategist and Ex-GM of Wu Tang Management. As CEO of AfricaPrebrief – I guide US-based investors in African economies. I write in memory of Jude Wanniski (polyconomics.com)

Let's Make A Deal: Unemployment Insurance And Minimum Wage For Capital Gains And The Corporate Tax

“The political process has as its ultimate aim a solution to the basic economic problem that for all time has confronted the global electorate, which is the tension between income growth and income distribution.”

- Jude Wanniski

There’s a very simple short-term solution to the problem of addressing income inequality and the need for economic growth. It is improving the country’s capital-to labor-ratio – increasing the stock of wealth available to produce goods and services while reducing unemployment. This is fundamentally an economic problem but one which Jude Wanniski noted always requires a political solution, and therefore compromise to address.

The blueprint for such an agreement was laid down in December of 2010 when President Obama and Congressional Democrats traded a two-year extension of the Bush-era tax cuts for a one-year extension of unemployment benefits.

With that prism, and with an eye on acknowledging that in response to an economic contraction like that just experienced, both the redistribution and growth impulses are legitimate – the elements of an appropriate compromise are apparent.

A deal must include something which bolsters entrepreneurship and investment while patching up the safety net for the 2 to 3 remaining years before we return to full employment. The agreement would carry us through both Congressional elections and the end of the Obama second-term, allowing a new President and Congress to complete the pivot away from distribution and toward economic growth.

Democrats should be willing – for two years – to 1) lower the top capital gains tax rate from 20% to 15% (the Bush era level) 2) eliminate all taxation on capital gains, dividend and interest income on those earning less than $250,000 (a proposal of Mitt Romney’s) and 3) lower the corporate tax rate from 35% to 28% (as part of a corporate tax reform sought by Senator Max Baucus).

In return, Republicans should be willing to 1) extend unemployment insurance benefits for one year and 2) raise the federal minimum wage to $10.10 per hour.

Both sides would be obtaining long-sought objectives while giving the nation a show of bipartisanship building on the humble display of Rep. Paul Ryan and Senator Patty Murray in recent budget negotiations. It also would allow each side to claim credit for an improved economy without compromising principled arguments.

The leading rhetorical obstacle – that such an effort wouldn’t pay for itself is easily overcome.

First, the Baucus corporate tax reform immediately taxes profits from the goods and services sold by American corporations into the country from foreign subsidiaries. The Democratic-leaning New York Times acknowledges, “It would establish a temporary 20 percent tax rate on billions of dollars in corporate earnings that have been parked abroad and would order all such earnings to be taxed, payable over eight years, creating a one-time windfall of more than $200 billion for the Treasury.”

More political cover from the Right can come from the influential Club For Growth who in concept support a minimum wage for corporate tax cut trade. On the Sunday January 5, 2014 ‘Washington Journal’ program on C-SPAN, The Club For Growth’s Vice-President For Government Affairs, Andrew Roth showed how to make principled arguments for what you believe while opening the door for a negotiation, “On minimum wage I think that everybody firmly believes that price controls don’t work. Nixon tried them in the 1970s with disastrous results and it’s just unfortunate people don’t recognize that the minimum wage is a price control; it’s a price control on labor, so it doesn’t work. Now as a political tool, if you wanted to pair it with corporate tax reform, you’d have to see what it’d look like. If it as a massive drop in the corporate tax rate and it was extremely pro-growth, then maybe something could be done.”

For Democrats who argue for demand-side economics and who rest their hat on the economy’s two-thirds dependence on consumption, capital gains tax reduction (especially when totally eliminated for those under $250,000) and corporate tax reduction (especially when coupled with loophole reform) is a small pill to swallow for 1.3 million Americans to continue receiving benefits and an estimated 5 million Americans being lifted above the poverty line.

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The electorate wants a minimum wage increase because it has not shared in productivity gains due to distortions primarily caused by monetary policy. This was as true in 1869 when the Knights of Labor started as it was in 1971 when Nixon de-linked from Gold. That’s why it has to be coupled with tax reduction that aids capital formation. But you do make other important points in your column – thanks for sharing

The suggestion seems to be that multinational corporations get a tax windfall without creating any jobs. Simply add some months to the unemployment safety net (paid for with other program cuts) and the corporations will let congress reduce their tax rate.

A much better idea is to let the corporations pay for the high unemployment caused by their shifting of jobs and profits overseas by eliminating all or some of the unnecessary tax deferral. Congress might eliminate all corporate tax expenditures while they are at it. The corporate profits and stock market prices make it clear that corporations don’t need help.

Families need jobs and that can be accomplished by replacing the job killing payroll taxes (worst tax) with a value added tax (best tax worldwide). Workers would get an immediate 7.65% boost in take home pay.

There is no need to impose a federal minimum wage on all the states because the states are quite capable of making their own adjustments – over 20 states already have.

Hear! Hear! Communist China had much more income equality in 1970 after the Cultural Revolution devastated the nation’s economy. Today China has pronounced income inequality at the cost of 500 million Chinese rising out of abject poverty, almost a 500% increase in per capita wealth, and one of the fastest growing economies in the world.

Yet “envy” as you point out blinds those stricken with it to the truth.

85% of economic studies of the minimum wage shows it hurts low skill workers. How is hurting low skill workers “A Deal” in any way shape or form? The minimum wage keeps low skill workers from acquiring skills that will allow them to progress to higher paying work. Raising the minimum wage is the single most counter productive policy bouncing around the political class today. It is sad to see it arrive on the pages of Forbes. The author does not offer a logical or rational argument that supports the premise that raising the minimum wage helps low skill workers. All we have here is an argument for political expediency at damn the torpedoes cost to those who can bear the costs least, lower skill workers.

Republicans continue to be focused almost exclusively on economic growth as the solution to all of our problems. But economic growth does not mean that all Americans benefit from that growth. Sure, we need to have economic growth in order for the job market to create more jobs. But GDP can increase without lessening unemployment or raising wages for struggling Americans.

That’s why President Obama and the Democrats are wise to focus on inequality. Republicans continue to be perceived as being the party that doesn’t care about regular people. The long-term unemployed are disposable to the GOP, just like the 47%. And, that’s why it is doubtful that the GOP will win the presidency in 2016. They likely will do well in 2014, but their policies and their “blame the victim” attitude toward struggling Americans will cause voters nationally to rely on Democrats to help them, even if the Democrats spend too much money.